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Is the company, that is a personal services entity that is not conducting a personal services business (PSB), entitled to the entrepreneurs' tax offset (ETO) under section 61-505 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The company, that is a personal services entity that is not conducting a PSB, is entitled to the ETO under section 61-505 of the ITAA 1997 since all the conditions under subsection 61-505(1) of the ITAA 1997 are satisfied.

The company is not conducting a PSB.

The company's ordinary income includes the PSI of an individual who performs personal services for the company.

The company is an simplified tax system (STS) taxpayer for the year and their STS group turnover for the year is less than $75,000.

The company's STS annual turnover is greater than the deductions attributable to that turnover.

Subsection 61-505(1) of the ITAA 1997 states:

You are entitled to a *tax offset for an income year if: (a) you are an individual or a company; and (b) you are an *STS taxpayer for the year; and (c) your *STS group turnover for the year is less than $75,000; and (d) you have *net STS income for the year. * denotes a term defined in section 995-1 of the ITAA 1997

In the present circumstances the company clearly satisfies paragraphs 61-505(1)(a) to 61-505(1)(c) of the ITAA 1997.

To determine whether the company satisfies paragraph 61-505(1)(d) of the ITAA 1997, it is necessary to consider the meaning of net STS income for the year.

Section 61-525 of the ITAA 1997 provides that an entity's net STS income is the amount of STS annual turnover less any deductions attributable to that turnover. Further, STS annual turnover is the sum of the value of business supplies made during the year.

The provision of personal services by the individual for the company is a business supply made by the company and therefore the value of that supply, being the amount of PSI, is included in the company's STS annual turnover.

Through the application of sections 86-15 and 86-20 of the ITAA 1997, the assessable income of the individual who performs the personal services includes the amount of ordinary income of the company that is the PSI of the individual, reduced by certain deductions to which the company is entitled. Pursuant to section 86-30 of the ITAA 1997, this amount does not form part of the assessable income of the company. However, the amount of PSI to be attributed to the individual is not a deduction attributable to the STS annual turnover in calculating the company's net STS income.

Since in the present circumstances the company's STS annual turnover is greater than the deductions attributable to that turnover, the company has net STS income for the year and satisfies paragraph 61-505(1)(d) of the ITAA 1997.

Accordingly, the company satisfies all the conditions under subsection 61-505(1) of the ITAA and is therefore entitled to the ETO. Note: Subsection 61-505(2) of the ITAA 1997 provides the method of working out the amount of ETO to which the company is entitled. The first step in the calculation is to determine the company's taxable income. As PSI does not form part of the assessable income of the company, unless the company has ordinary or statutory income other than PSI its taxable income will be nil. If that is the case, the amount of ETO to which the taxpayer is entitled will be nil.